NISM Series XIX-E · Chapter 5: Alternative Investment Fund Ecosystem

L1 · Foundation

Who Is Who in the AIF Ecosystem

The four constituents of the private capital ecosystem, the investors who back AIFs and the entry rules for them, the roles and duties of sponsors, trustees and managers, conflicts of interest, how managers earn, crowdfunding and corporate venture capital, and co-investments.

16 min read · Worth 5% of the paper · Written from pages 90–118 of the official NISM workbook · Updated 18 September 2026

Who Is Who in the AIF Ecosystem

5.1 The four constituents

The AIF industry is nurtured by the PRIVATE CAPITAL ECOSYSTEM, which consists primarily of:

	Constituent	What it does
(a)	Investors	Look out for alternative investment opportunities
(b)	Alternative investment managers	Have the expertise to identify, invest, manage and harvest returns for investors
(c)	Sponsors	Initiate and float the AIFs - more often the managers themselves
(d)	External service providers	Facilitate and make up the ecosystem

AIFs witnessed significant growth after 2012, after the SEBI (AIF) Regulations, 2012, and each constituent grew with them.

5.1.1.1 The investors

Investor type	Why they suit AIFs
Foundations and Endowments	A foundation is a not-for-profit that donates funds to other organisations for charity. An endowment is an investment fund set up by an individual or institution (a university, hospital or foundation) for pre-defined purposes, with a PRINCIPAL PROTECTION objective. Both have long horizons and large corpuses, so they can invest over long gestation periods and manage illiquidity
Insurance Companies and Pension Funds	Pension fund money has been a significant catalyst for AIF growth globally. Insurers have large, long-term corpuses. In India, both have REGULATORY CAPS on alternative investments, especially in the unlisted space. As the largest pool of domestic capital in India, their role is crucial
Sovereign Wealth Funds	Started by countries with large trade surpluses from oil and global commerce - OPEC members (notably Kuwait, Saudi Arabia, Qatar, UAE), Norway, China, Japan, Singapore and Malaysia. India has seen a large influx of SWF money in listed equities, start-ups, infrastructure and AIFs
Family Offices and HNIs	Since 2012 the Indian AIF industry is being led by HNI accounts under private banking managers and advisers, family offices, corporate investors, bank-promoted AIFs and offshore investors. Family office consultants used AIFs as a diversification tool
Fund of Funds	A pooled vehicle that invests in OTHER AIFs, for diversification across strategies. Separately Managed Accounts (SMA) are a carve-out from the fund structure. Indian FoFs are still evolving; global FoF AUM has grown significantly

Who may invest, and on what terms

Indian, foreign and NRI investors can contribute to an AIF's corpus. Foreign investors are governed by FEMA. All resident Indians can invest from domestic sources, but DIIs such as banks, insurers and pension funds are further governed by their own regulations on eligibility and amount.
Minimum investment by each investor: INR 1 crore.
Minimum corpus of each scheme: INR 20 crore.
Maximum investors in a single scheme: 1,000.
Money may be raised ONLY through PRIVATE PLACEMENT.

"Corpus" means the total amount of funds COMMITTED by investors to the AIF by a written contract or similar document, as on a particular date.

Accredited Investors (AIs): SEBI introduced this concept to give flexibility to HNIs and institutional investors investing in AI-only funds (including large value funds), angel funds and so on. AIs may get flexibility in minimum investment and concessions from some regulatory requirements, subject to conditions.

What investors are called

AIF structure	Investors are called	The corpus is represented by
Trust	Unit holders or contributors	Unit capital
Company	Shareholders	Share capital
LLP	Partners	Limited liability partnership interest

Unit capital is defined as the BENEFICIAL INTEREST of an investor in the AIF or scheme. The unit holder gets a proportionate share based on units held, and the economic benefit shows up as growth in NAV, disclosed periodically.

Accessibility: SEBI has notified that all digital platforms provided by AIFs to investors must comply with the Rights of Persons with Disabilities Act, 2016 and its rules.

5.1.1.2 Sponsors

A sponsor is any person or entity responsible for FORMING and REGISTERING the AIF with SEBI. It includes the PROMOTER in a company and the DESIGNATED PARTNER in an LLP.

After registration, the sponsor invests in the capital of the company or partnership. If the AIF is a trust, the sponsor contributes to the capital of the investment management company.
Its critical functions: sponsoring the fund, defining the theme, constituting the structure, registering with SEBI, and forming the initial and later corpuses.
The sponsor can also be the manager.
It must be a "fit and proper person" under Schedule II of the SEBI (Intermediaries) Regulations, 2008.
Any change in sponsor must be INFORMED to SEBI. A CHANGE IN CONTROL of the AIF needs SEBI's PRIOR APPROVAL.
Sponsors can be any person or persons, including institutions or companies.

5.1.1.3 Trustees

A trustee or trustee company is appointed when the AIF is a trust.

There is NO requirement to appoint a SEBI-REGISTERED trustee.
The Regulations do not prescribe qualifications, certification or legal form for trustees - but they DO lay down a code of conduct.
SEBI reviews the trustee's appointment at registration, and later changes must be notified to and approved by SEBI.
The trustee must be a person of ability and integrity, not guilty of moral turpitude, any economic offence or violation of securities law.
The trustee CANNOT be the manager, a director (including independent director), officer or employee of an investment management company.
The trustee ensures all transactions by managers comply with the regulations and the scheme's objectives, and that investors' interests are not compromised in dealings with distributors, service providers and even unit holders of other schemes.

5.1.1.4 The investment manager

The manager is appointed by the sponsor to manage the AIF's investments, and may be the same as the sponsor. It needs skill and expertise and adequate experience in financial services, investment planning, portfolio management and investment management.

It frames strategy around economic cycles, market sentiment, time horizon and exit or redemption plan.
It keeps investors informed on progress, investments, key terms, industry developments and follow-on funds.
Fit and proper under Schedule II of the SEBI (Intermediaries) Regulations, 2008.
A change in manager must be informed to SEBI. A change in control of the investment management company needs SEBI's prior approval.
In an LLP structure, common abroad, the managers are known as GENERAL PARTNERS (GPs) or designated partners.

Six general obligations of sponsors, managers and trustees

Obligation	The rule
Appointing a custodian	Compulsory. The custodian must be SEBI-registered, for safekeeping of securities, and keeps custody of securities and goods received on physical settlement of commodity derivatives
Review policies	Policies and procedures, and their implementation, reviewed regularly
Audited financials	Books audited ANNUALLY by a qualified auditor
Dispute resolution	Procedures for disputes between investors and the fund - arbitration or any mechanism mutually decided
Maintenance of records	For 5 YEARS AFTER THE WINDING UP of the fund - assets, valuation policies, strategies, investor details and contributions, and decision-making process
Inspection	Co-operate with SEBI's inspection of records, assessment of systemic risk or prevention of fraud

Conflicts of interest

The sponsor and manager or trustee have a FIDUCIARY DUTY towards investors, and must disclose all conflicts as and when they arise or are likely to arise. Every AIF shall have a CONFLICT OF INTEREST POLICY, and managers and sponsors monitor compliance with it.

Examples at fund-constituent level: employees of the sponsor, AMC, trustee and service providers should not have conflicts when disclosing information; conflicts between investors and manager must be disclosed and resolved; employees should not solicit gifts or hard or soft commissions; conflicts in the manager's co-investments must be disclosed to potential and existing investors BEFORE any allocation; and a conflict must be disclosed if the trustee is a group or associate entity of the AIF, sponsor or manager, or shares directors.

Examples at staff level: an employee's economic interest must not run against the fund's; no bias from personal, family or friendship ties with a counterparty; and no working for another entity with the same economic interest or business.

All conflicts, present or potential, are disclosed to the COMPLIANCE function. The policy must describe: the nature of possible conflicts, the mitigation methodology, and a disclosure mechanism that informs investors and seeks their acknowledgement.

The five roles of an investment manager

Deal sourcing - finding and closing good transactions, through networks of investment bankers, chartered accountants, corporate advisers, consultants, corporate heads and policy makers. A large part of a manager's time goes into networking.
Structuring and investing - industry specialists with profound deal-making skills, keen negotiators, able to blend incentives and returns while managing risk.
Active management - hands-on, but without day-to-day management control; through board seats, observer roles or policy advice. This is why AIF investment management is argued to be an ALTERNATIVE MODEL OF CORPORATE GOVERNANCE that mitigates AGENCY RISK.
Harvest returns - managing exit risks is probably THE MOST IMPORTANT skill attribute of a manager, since many AIF investments are illiquid.
Relationship management with investors - timely, regular engagement.

Who earns what

Earner	Remuneration
Fund managers (executives of the investment management company)	A salary, and profit sharing or bonus from the IMC's profits
The investment management company (from the AIF)	Management fees; additional returns based on performance and the investment agreement; a share of exit loads and other fees defined in the PPM

In an LLP AIF, managers are also PARTNERS alongside investors, and share returns under the partnership agreement. In India, such contribution is MANDATORY under the regulations.

5.1.2 Crowdfunding and corporate venture capital

Crowdfunding (Investopedia): "the use of small amounts of capital from a large number of individuals to finance a new business venture." SEBI's consultation paper (June 17, 2014): "a solicitation of funds (small amounts) from multiple investors through a web-based platform or social networking site for a specific project, business venture or social cause."

A technology platform acts as intermediary between fund seekers and investors or donors.
For start-ups, it is a catalyst for SEED stage financing.
Donations are largely for social causes; loans and equity are for commercial businesses. It has proved effective mostly for social or humanitarian causes.
Loans through crowdfunding are Peer-to-Peer (P2P) lending, under the RBI.
Equity crowdfunding is quite uncommon in India because of private placement regulations (Section 42 of the Companies Act 2013).
SEBI noted the benefit - lower cost of capital by spreading risk across many retail investors - and the risks - retail exposure to early-stage businesses and no standardised disclosure.

Corporate Venture Capital (Business Dictionary): the "practice where a large firm takes an equity stake in a small but innovative or specialist firm, to which it may also provide management and marketing expertise; the objective is to gain a specific competitive advantage". Used by Microsoft and Intel to nurture synergistic tech start-ups.

The essential difference: VC is a POOLING concept; CVC is an ON-BALANCE SHEET investment by a corporate. VC is part of the financial industry; CVC is strategic investment.

5.1.3 Co-investments

Under the SEBI (AIF) Regulations, co-investment means investment by a MANAGER, SPONSOR or INVESTOR of CATEGORY I and CATEGORY II AIFs, in UNLISTED securities of investee companies where those AIFs invest.

The workbook's illustration: a scheme invests INR 100 crore in a company that needs INR 300 crore. The manager may offer the extra opportunity to scheme investors who want to invest in addition to their AIF investment.

Two routes for co-investment:

Route	How it works
(a) Co-investment Portfolio Manager	Under the SEBI (Portfolio Managers) Regulations, 2020 - the investor gets the right to invest directly in the investee company in parallel with the AIF
(b) Co-investment scheme (CIV scheme)	A scheme of a Category I or II AIF that facilitates co-investment for investors of a particular scheme, in unlisted securities of a company where that scheme is investing or has invested

The investor negotiates the co-investment right at the time of SUBSCRIPTION.
The manager can choose which route is more feasible.
Why investors want it: a larger direct exposure to an attractive opportunity; without it, returns depend on the scheme alone.
Co-investment rights are NOT a standard feature and are generally offered to ACCREDITED INVESTORS.

Think of it like this

The sponsor is the person who books the marriage hall

In a family wedding someone books the hall, chooses the theme, gets the permissions and collects contributions from relatives - that is the sponsor, who forms and registers the AIF and builds its corpus. Often the same uncle also runs the event on the day, just as the sponsor is more often the manager. The caterer, decorator and photographer are the service providers. And an elder who is not part of the organising team keeps an eye on whether money is spent as promised - which is why the trustee cannot be the manager or its director, officer or employee.

Five years of records after winding up is the chit fund register kept after the last draw

When a neighbourhood chit fund finishes its final month, a careful organiser keeps the register for years, because a member may still ask who got paid what and when. The AIF rule is the same idea made formal: the sponsor or manager keeps records of assets, valuation policies, strategies, investor contributions and decision-making for five years after the fund is wound up - not five years from launch.

Co-investment is the extra helping offered to guests already at the table

A host serving a feast has a fixed number of plates for the group. When there is more biryani than the group plates can hold, the host offers second helpings only to guests already seated - not to people walking past. A co-investment works the same way: the scheme puts in INR 100 crore of a company's INR 300 crore need, and the manager offers the extra to the scheme's own investors. And like a host who tells guests about the second helping before serving it, a manager must disclose co-investment conflicts before any allocation.

VC is the shared kitchen, CVC is the restaurant buying a stake in a spice supplier

Several families pooling money to run a shared kitchen are investing together - that is venture capital, a pooling concept in the financial industry. A large restaurant chain that buys a stake in a small organic spice maker, and teaches it how to package and sell, is making a strategic move on its own books to secure a competitive edge. That is corporate venture capital - an on-balance-sheet investment by a company, the way Intel and Microsoft have backed start-ups.

Harvesting returns is knowing when to sell the mangoes

Any farmer can plant a mango orchard; the skill that decides his income is selling at the right time, before the market is flooded and before the fruit spoils. AIF investments are often illiquid, like an orchard that cannot be sold in a day. That is why the workbook calls harvesting returns - managing exit risk - probably the most important skill of an investment manager.

Key terms in this chapter

Additional return (carry): The AUM of the fund minus the higher of the reference hurdle or the high-water mark at the end of the financial year; the performance fee is a percentage of this.
American waterfall: Distribution letting the manager take incentive fees deal by deal before investors receive all capital and preferred return; suited to pure debt funds and usually paired with a clawback.
BRSR: Business Responsibility and Sustainability Reporting - SEBI's standardised ESG disclosure framework, mandatory for the top 1000 listed entities from FY 2022-2023, with 9 KPIs under BRSR Core.
Capital commitment: The legally binding total amount an investor agrees to contribute over the fund's life, called up by the manager through capital calls. The minimum per investor is INR 1 crore (INR 25 lakh for employees or directors; not applicable to accredited investors).
Catch-up clause: A term under which, after investors receive capital and preferred return, the manager takes the next distributions in full until its share reaches the agreed percentage of total return.
CIV scheme: A co-investment scheme of a Category I or II AIF that lets investors of a particular scheme co-invest in unlisted securities of a company where that scheme is investing or has invested.
Clawback: A right letting investors recover performance fees paid on early exits to offset later losses, so fees reflect full netting over the fund's life. Only as good as the manager's ability to refund.
Co-investment: Investment by a manager, sponsor or investor of a Category I or II AIF in unlisted securities of a company where that AIF invests, made through a Co-investment Portfolio Manager or a CIV scheme.
Conflict of Interest Policy: A mandatory AIF policy describing possible conflicts, how the manager will mitigate them, and how investors are informed and asked to acknowledge the risks.
Corporate Venture Capital: A large firm taking an equity stake in a small innovative firm, often adding management and marketing expertise, to gain a competitive advantage. Unlike VC, it is an on-balance-sheet strategic investment rather than a pooling concept.
Corpus: The total amount of funds committed by investors to an AIF by written contract or similar document, as on a particular date. The minimum corpus per scheme is INR 20 crore.
Crowdfunding: Per SEBI's 2014 consultation paper, a solicitation of small amounts from multiple investors through a web-based platform or social network for a project, venture or social cause. Loans raised this way are P2P lending under the RBI.
Default in drawdown: An investor's failure to pay a capital call, after which it substantially loses rights and returns; remedies include reducing the commitment, charging interest or terminating the agreement.
Drawdown: The process of calling committed capital from investors through drawdown notices as funds are needed for investment.
Dry powder: The undrawn part of committed capital - committed capital minus the amount drawn down (invested capital).
Endowment: An investment fund set up by an individual or institution such as a university, hospital or foundation, for pre-defined purposes, with a principal protection objective.
European waterfall: Distribution where investors first get all invested capital back pro rata, then the preferred return, before the manager receives carry (with or without catch-up).
Exit load: A fee on redemptions after the lock-in period but before the fund's tenure ends, ranging from 0 to 5 per cent of NAV as per the workbook.
First close and final close: First close is declared when commitments exceed the minimum corpus or a set fund-raising period ends; the final close must occur within a specified period after the first close.
Fit and proper person: The eligibility standard for sponsors and managers, based on criteria in Schedule II of the SEBI (Intermediaries) Regulations, 2008.
Fund of Funds: A pooled investment vehicle that invests in other AIFs to diversify across investment strategies. Indian FoFs are still evolving.
Giveback: An alternative to reserve creation in Indian waterfalls, where amounts are adjusted against givebacks by investors from distributions; preferred returns are not payable on giveback amounts.
Green shoe option: An over-allotment option letting an AIF increase fund size when commitments exceed the target. The AIF Regulations have no express provision, but it must be disclosed in the Placement Memorandum and can be exercised before final close.
High-water mark: The higher of the subscription price of a class of units or the highest NAV at the end of any previous financial year, used to compute the manager's incremental return.
Hurdle rate (preferred return): The threshold return investors must receive before the manager earns additional returns. It benchmarks expectations and is not a guarantee.
Management fee: The fee paid by the fund to the manager, usually 1-2.5 per cent per annum; payable even if the fund makes no profit, with GST usually charged on top.
Private capital ecosystem: The system that nurtures the AIF industry - investors, alternative investment managers, sponsors (often the managers themselves) and external service providers.
Redemption gate: The maximum amount investors may redeem in each redemption period, subject to expenses, taxes and exit load.
Sovereign Wealth Fund: A state-owned fund started by countries with large trade surpluses, such as OPEC members, Norway, China, Japan, Singapore and Malaysia, which allocates money across markets including through AIFs.
Sponsor: The person or entity responsible for forming and registering the AIF with SEBI, including the promoter of a company and the designated partner of an LLP. It must be fit and proper, and a change in control needs SEBI's prior approval.
Sponsor commitment: The sponsor or manager's own continuing cash investment in the AIF - for Category III, not less than 5 per cent of corpus or INR 10 crore, whichever is lower - locked in until investors are fully paid.
Stewardship Code: SEBI's code (circular of December 24, 2019) for all categories of AIFs investing in listed equity - covering stewardship policy, conflicts, monitoring, intervention and collaboration, and voting.
Term sheet and SOPT: A non-binding first-step document between an AIF and an investee company; the Summary of Principal Terms sets out the terms on which the AIF is willing to invest.
Trustee (of an AIF): Appointed when the AIF is a trust. Need not be SEBI-registered but follows a code of conduct, and cannot be the manager or a director, officer or employee of the investment management company.
Unit capital: The corpus of an AIF trust, defined as the beneficial interest of an investor in the AIF or scheme; its value grows with NAV.

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Original explanatory writing based on the official NISM workbook for Series XIX-E, which is published and copyrighted by NISM. Check figures against the current edition at nism.ac.in.

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